Cost of Hiring / Retention (COH)

Do companies really know what it costs them to hire a new IT employee?  How does that compare to the price of retaining an existing team member?  Many companies shy away from the idea of implementing a formal retention plan because they fear it will cost too much and take too much effort, but could that tedious and sometimes costly process really save the company time and money in the long run?

On average IT professionals change jobs every 2 to 3 years.  Younger professionals tend to change even more frequently, and in many cases they opt for project-based work as opposed to long-term employment altogether.  This constant churning, which is in large part caused by the ever-changing nature of the industry, leaves most companies in an endless battle against turnover in their IT department, regardless of market conditions. 

The Importance of the Issue Today
As an IT manager, you work hard to add value to your business by providing revenue-generating or cost-saving systems.  With global demand for products and services at an all-time high, the need for increased productivity is immeasurable.  Therefore, the strategic importance of the IT department has never been greater, and it is vital, now more than ever, that you are able to find and retain the best staff possible.

Unfortunately, as the need for skilled IT workers increases, the supply continues to dwindle.  In a recent article, CIO Insight reported that “joblessness among American IT workers averaged 2.1 percent (in 2007), down from 2.5 percent in 2006.  That's the lowest unemployment rate for IT (professionals) since the government began using the current method to track employment in 2000, when IT joblessness stood at 2.2 percent.”[1]  Considering that most economists consider an occupation to be at “full employment” when its unemployment rate is at or below 4.5 percent, these statistics indicate a real problem for the industry. 

Today’s IT managers are finding it nearly impossible to locate well-qualified IT professionals who are readily available for hire.  As a result, IT managers are going to great measures to recruit top workers away from other companies.  This has led to a major increase both in the amount of churning within the industry and turnover rates across the board. 

Total Cost of Hiring
So what is turnover costing your company?  When employees leave, there are two types of costs you must consider in replacing them.  The first of these, direct costs, is easily measurable.  Direct costs include things such as job ads, external recruiting fees, sign-on bonuses, salary increases, and other costs related to the hiring of the new employee. 

Secondly, indirect costs, which are more related to the loss of the existing employee, are typically more difficult to calculate.  They include such things as loss in training.  When an employee leaves, he takes with him all the skills and knowledge which were acquired at the cost of great time and expense to the company.  In addition, when the IT department is running understaffed while management searches for a replacement, the loss of productivity comes at a huge price.  If the company chooses to hire consultants to help with the workload in the interim, there is a hefty cost involved as well.  If an employee’s leaving is caused by a major management issue, there may be costs associated with the decline of the other team members’ morale, or even worse, the company may lose multiple employees at once.


Studies show that the actual cost of replacing an employee can amount to more than three times the employee's annual salary depending largely on the time it takes to fill that position.  Furthermore, as we discovered in our own research, direct costs alone can account for nearly 80 percent of a position’s annual salary.  Part of that amount goes toward the increase in base compensation required for the new employee.  Experience shows that when hiring a new professional to replace an existing employee, you should plan on increasing the position’s salary anywhere from 12 to 15 percent.  In a scarce labor market like that of today, you should anticipate the increase to be as much as 30 percent if you want to attract top talent to your company.  In some cases you may find yourself paying a higher salary for a professional with weaker skills, but that is the price you pay for turnover.

Another large chunk of the direct costs goes toward external recruiting fees.  You may think that by relying simply on internal recruiters you could save your company a great deal of money.  Unfortunately, that is not the case.  The average time it takes for JDA to fill a position using our structured search process is about 30 days.  On the other hand, it takes most of our clients over six months to find a viable candidate to fill a difficult position such as SAP or 11I.  Keeping in mind that time is money, the longer it takes to hire a replacement, the more it will cost your company.  In the majority of cases, JDA’s recruiting fees are greatly offset by the reduction in the time it takes for us to fill your position.   

Applying the statistics we’ve provided thus far, the direct costs of replacing an employee who makes $60,000 per year would equate to over $49,000.  When added with indirect costs, you can expect that the total cost of hiring will total $150,000.  Let’s take a look at how that is possible.
 

A BETTER ALTERNATIVE
With the cost of hiring so significant and the effect on company morale so long-lasting, it is understandable that companies and managers are constantly looking for a viable alternative.  Often times after examining real numbers, many find themselves open to the possibility of employee retention as opposed to employee replacement. 

TOTAL COST OF RETENTION
In developing an effective retention strategy you must include both monetary rewards and non-cash incentives.  While this may cost the company some money, the expense is typically minimal in comparison to the burden of hiring a new employee. 

Show Them the Money
Standard monetary rewards include salary increases and performance bonuses.  From experience, we know that annual raises traditionally range between 4 and 6 percent of the employee’s current base salary, and bonuses range between 6 and 10 percent.  Often times, when our clients are looking for ways to retain their staff, we encourage them to adjust their salaries to just above the going rate.  In doing this, we also encourage them to let their employees know that this is their way of showing the real value each employee brings to the company. 

While most companies understand the need to retain employees through monetary means, many have a greater need to keep the company’s fixed costs to a minimum.  If this is your issue, quarterly bonuses can be used as a company-wide performance incentive or as one-off rewards for employees that go above and beyond.  This too will allow you to increase your employees’ overall compensation without adding a permanent amount to their annual salaries.  Furthermore, quarterly bonuses are recommended over year-end bonuses as a way to avoid potential mass-exiting of employees who may wait until year-end bonuses are awarded before tendering their resignations. 

Develop Creative Incentives
In addition to monetary compensation, employees today put great emphasis in both their overall quality of life and their career progression.  Therefore, it is important that companies provide creative non-cash incentives that help keep their employees happy while helping to further their professional development.  Examples of non-cash incentives include: 

Flexible Scheduling
In recent years, flexible scheduling has become a very popular way to retain employees.  Some companies will require employees to work a certain number of hours in a week, but allow the employee to choose the exact times.  Other companies will allow their employees to work 10-hour days Monday through Thursday in exchange for Fridays off.  Many companies will simply implement the policy of flex-time meaning that employees can exchange overtime one day for time off another.  Any way you put it, flexible scheduling gives employees more quality time with friends and family which leads to greater happiness, and ultimately happy people make better employees.

Telecommuting
In addition to flex scheduling, many companies today allow employees to telecommute.  This helps cut down on the amount of time employees must spend in their cars each day.  With the price of gas going up and the realization that long commutes are the number one reason for resignations, this strategy alone could prevent many employees from leaving your company.

Show Appreciation
At some point or another every one of us needs to be told we are doing a good job.  Your employees are no different.  As managers we often use encouraging words to make our new employees feel welcome, but often we forget that our long-term employees need affirmation as well.  Flattery is great, and it’s free.  In addition to kind words, you can also show your appreciation with occasional gift cards to an employee’s favorite restaurant or tickets to a new show in town.  Just keep in mind that if employees go long enough without knowing they are valued, they could start looking elsewhere for assurance.  

Better Benefits
Every employee likes benefits.  One way to retain long-term employees is to increase their vacation time.  While there is a minimal cost associated with time off, it is typically offset by the fact that when employees get enough rest, they return to work more motivated and productive than before.  For newer or part-time employees, you may decide to implement or enhance their medical benefits package.  The cost associated with this strategy is typically offset by the idea that you will have healthier employees.

Career Path
Career progression is very important for most employees.  Therefore, it is important to establish clear and precise career paths for all IT personnel in your company and to ensure that each is made aware of the rewards and requirements.  Nothing is worse than going to work every day with no direction or motivation.  If your employees know exactly what must be done to get to where they want to go professionally, and they have seen it work for other employees in the company, they will be more likely to stay with your company and to work hard while they are there.

In developing career paths for your employees, it is important that you consider all the options.  In visualizing career paths, most people automatically think of vertical movement which is when an employee is promoted up the chain of command to a level of greater significance and more responsibility.  Many employees are looking for that type of advancement, but in some cases horizontal movement is a better option.  Horizontal movement consists of an employee transferring to another position within the company that is equal in significance and responsibility to his or her current position but typically involves learning new technologies or processes.  In other cases, the best move for an employee may be outside your company, which is sometimes called external movement.  Given that option, you may be asking yourself how external movement could possibly help in reducing turnover for your company. 

Let’s consider the example of Lou Holtz.  For years he was the head coach of the Notre Dame football team, and he is considered by many to be one of the best coaches of all times.  Why is that?  Lou took it upon himself to constantly search for coaching jobs outside of his organization so that his assistant coaches would have the opportunity to further their own careers.  He knew that the only way they could advance with Notre Dame was if he left the team, and he knew that wasn’t going to happen anytime soon.  As a result of his looking out for his employees’ best interests, many in football had dreams of working for Lou.

In another example, JDA recently contacted one of our clients with a CIO opportunity which we thought he might be interested in pursuing.  He informed us that his plan was to stay with his current company until retirement, but insisted that his second-in-command might be a perfect fit.  Again, our client knew that this employee had no chance of advancing his career in his current position, so he found an opportunity for that person externally.  While the employee did not get the new position, our client won this individual’s respect and loyalty by showing a genuine interest in his future.

Training
While most employees are interested in career advancement, they are also interested in expanding their knowledge base.  Therefore, providing ongoing educational opportunities is a great way to encourage employees that your company is the best place for them.  Whether you provide training opportunities which allow them to better do their current job, or you pay for their formal education which will impact their performance in a future position, it is a win/win situation for both the employee and the company.  The key here is that employees be able to use what they learned to improve the effectiveness of their job performance. 

Additional Exposure
In addition to formal training and education, most employees enjoy being exposed to new technologies and procedures within the company.  This is good for employees because they often get bored with repetition, and it is good for you as it broadens the employees’ level of value to the company.

Communication
Most employees do not like surprises, and they don’t care to hear major news which might affect them via the company newsletter or the company rumor mill.  For this reason, it is important that you keep your employees informed of what’s going on within the company.  You can take this concept one step further and actually ask for your employees’ input and ideas on upcoming projects, being sure to follow up later and let them know whether or not you have opted to use their ideas and why.

It is also important that you let your individual team members know how they are doing as employees.  It is not enough to discuss their performance in an annual review.  As questions or problems arise address them with the employee directly and immediately.  This will keep any small nuisance from becoming a major disaster. 

As you can see, there are many options from which to choose when developing a plan for retaining your employees.  Looking at all the retention tools available, both monetary and non-cash, let’s calculate what it would likely cost to retain the same $60,000-per-year employee whom we discussed replacing in the previous scenario. 

 
In this scenario, the total cost of retaining the $60,000-per-year employee is $128,210 less than the estimated cost of replacing him.  Stretch that number out over several years, and the difference would grow exponentially.  

IMPLEMENTING A PLAN
The answer is obvious; the most cost-effective and productive way to deal with today’s increasing turnover in the IT industry is to implement an effective retention plan.  But, before you get started there are a couple things to consider. 

First of all, it is unfortunate that you must realize you will have neither enough time nor money to save all of your employees.  For that reason, it is important to approach your retention strategy as you would a disaster recovery plan.  When planning for a disaster, companies must decide which are the most vital components to their business and concentrate the bulk of their efforts on those items.  In this same way, it is important that you implement the top-grading process when deciding which employees are the most vital to your business.  The top- grading process enables you to rank employees or potential employees based on the value they bring to your team and the organization.  The employees that are A candidates or considered your top-tier are those without whom your company could not easily survive such as key decision makers, top performers, and those with the most institutional knowledge.  The bulk of your retention budget and efforts should be focused on those employees.  For employees in the middle- and bottom-tier or considered B or C candidates, it is definitely worth your time and money to expend some retention efforts, but perhaps in a more limited amount.  As harsh as ranking may seem, it is the only way to effectively and realistically implement your strategy. 

Once you have sufficiently ranked your employees, you will want to develop separate retention plans for each of your tier groups which involve varying amounts of time and money.  Let’s say you have three tiers.  You may choose to implement all or most of the retention strategies we discussed earlier for those critical employees in your top tier.  For those in your middle-tier, you may increase their bonus percentages, introduce flex scheduling, and offer some additional training.  For your bottom-tier employees, you may just offer additional training and exposure which would give them the opportunity to move up in your ranking system in the future. 

In addition to customizing your strategy for each tier, it is important to make your retention efforts personal and direct for each employee.  Keeping in mind that each of your employees has different goals, different needs, and different motivations, it is important that you take the time to find out what drives them personally and use those ideas specifically to retain them.  When you meet with your employees to discuss these issues, whether it is on an annual basis or more frequently, let them know you are developing a retention strategy specifically for them, explain what you think it should entail, ask for their input, and let them know why it is important that they stay with your company.  Again, you will want to spend more time in developing individual strategies for your top-tier employees, but it is important that you understand and acknowledge your other employees as well.
 
A few strategies you could implement across the board with little time or money would be showing appreciation, developing standard career paths, and opening the lines of communication.  At JDA, we conduct monthly meetings for employees in order for everyone to be kept up-to-date, discuss any major issues, and reward those who have performed exceptionally during the month.  In addition, we have developed standard career paths for each of our departments and positions, which allow employees at all levels to envision and realize a future with our company. 

SAVING EMPLOYEES = SAVING TIME & MONEY
By implementing a formal retention strategy, you become a proactive manager who has a plan for dealing with employee issues or preventing them altogether.  By keeping employee issues to a minimum, you can increase retention, reduce turnover, and ultimately save yourself the time, money, and anguish that goes into finding new replacements.  While it is realistically impossible to save all your employees, you can reduce departmental costs significantly by at least saving your key staff members.

JDA Professional Services, Inc. is a leader in  Houston ’s IT staffing industry.  In business since 1981, we recognize that the employment landscape is always changing.  The trends we've outlined will continue to present challenges for employers, but they will lessen and strengthen over time.  While we recommend a strong retention plan as the best option to reduce turnover within your department, we also know that there will come a time when replacing an employee is inevitable.  In those times, we encourage you to take advantage of our vast experience by relying on us to help you find the highest quality IT employees in the least amount of time.  To discuss your current IT hiring needs, please contact JDA today at 713-548-5400.  We wish you continued success, and we look forward to hearing from you soon.


About the Author
James Del Monte, CERS, CPC
From modest beginnings in 1981, James Del Monte founded JDA Professional Services, Inc. which today is one of Houston’s leading IT staffing firms according to the Texas Association of Personnel Consultants (TAPC).  Over his career, James has helped hundreds of companies build great IT departments by finding key individuals and providing excellent strategies for employee retention.  In addition, he has helped thousands of professionals find great IT careers through direct placements and by providing valued advice and guidance. In November 2007, James joined an elite group of professionals becoming a Certified Employee Retention Specialists (CERS).  

James is a board member of both the TAPC and the National Association of Computer Consulting Businesses (NACCB).  He is a former president of the Houston chapter of the Association of Information Technology Professionals (AITP) and a founding member of the Open Door Education Foundation which provides scholarships to IT students.  In 2006, he was awarded the TAPC community service award for his commitment to the community and charitable contributions.

As part of his commitment to the advancement of IT training in Houston, James is a regular speaker at various colleges/universities, trade groups, and job ministries, and he is often quoted as a subject matter expert for the IT staffing industry.  Additionally, James serves on the advisory board for technology departments at the University of Houston Downtown, Westwood College, and ITT Technical Institute.

 

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